Mondelēz International, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited; amounts are in U.S. dollars unless noted. Mondelēz manufactures and markets snacks and other food and beverage products in more than 80 countries. The October 2012 spin-off of Kraft Foods Group makes year-over-year comparisons of total earnings and cash flow less directly comparable. The company reorganized into five reportable segments in 2013: Latin America, Asia Pacific, EEMEA, Europe and North America.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenues | $8.595 billion | $8.527 billion | $17.339 billion | $17.194 billion |
| Organic net revenue growth | 3.8% | — | 3.8% | — |
| Operating income | $865 million | $937 million | $1.699 billion | $1.840 billion |
| Net earnings attributable to Mondelēz | $616 million | $1.029 billion | $1.184 billion | $1.842 billion |
| Diluted EPS from continuing operations | $0.34 | $0.27 | $0.66 | $0.46 |
| Adjusted EPS, non-GAAP | $0.37 | $0.36 | $0.71 | $0.67 |
| Operating cash flow | Not stated separately | Not stated separately | $418 million | $1.208 billion |
Q2 organic growth reflected 3.6 percentage points from volume/mix and 0.2 points from pricing. Reported revenue growth was limited by unfavorable currency (1.9 points) and divestitures (1.4 points), partly offset by the Morocco acquisition (0.3 points). For the six months, reported revenue growth was likewise 0.8%, versus 3.8% organic growth.
Gross profit was $3.231 billion in Q2 and $6.473 billion for the six months. Management said gross margins were essentially flat year over year, while operating margin declined to 10.1% in Q2 from 11.0%, and to 9.8% for the six months from 10.7%. Higher overhead, marketing and promotional spending, input costs, restructuring costs and currency pressure weighed on operating income.
Q2 continuing-operations earnings increased despite lower operating income, with interest and other expense down to $235 million from $344 million and a 2.1% effective tax rate. The tax rate benefited from $108 million of favorable discrete items in Q2; six-month tax rate was negative 0.5%, aided by $233 million of favorable discrete items. Reported net earnings were lower than 2012 primarily because 2012 included the discontinued Kraft Foods Group operation: $544 million in Q2 and $1.024 billion for the first half.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.476 billion at June 30, 2013, down from $4.475 billion at December 31, 2012. Current assets were $13.738 billion and current liabilities $13.133 billion.
- Six-month cash flows: $418 million provided by operations, $582 million used in investing, and $1.728 billion used in financing. Capital expenditures were $568 million; dividends paid were $464 million.
- Total debt was $18.061 billion, compared with $19.425 billion at year-end; debt-to-capitalization was 0.37 versus 0.38. The company had $756 million of short-term borrowings and $14.986 billion of long-term debt.
- The $4.5 billion revolving credit facility was undrawn and expires April 2015. The company reported compliance with its minimum-equity covenant. It expected to meet near-term maturities, including $1.8 billion due in October 2013 and $500 million in February 2014, using operating cash, commercial paper or additional debt.
- The company repurchased 3.2 million shares in Q2 for approximately $97.5 million. Subsequent to quarter-end, authorization for repurchases was increased to $6.0 billion, with $5.9 billion remaining as of August 7, 2013. A quarterly dividend of $0.14 per share was also declared for payment in October.
Changes, outlook and notable items
- Management expected 2013 organic net revenue growth at the low end of its long-term 5%–7% target and Adjusted EPS of $1.55–$1.60. The EPS outlook used 2012 average exchange rates and included an estimated $0.04 per-share adverse impact from Venezuela.
- Foreign exchange reduced revenue by $163 million in Q2 and $360 million in the first half. Venezuela’s February currency devaluation resulted in a $54 million charge on net monetary assets and additional unfavorable earnings translation effects of $17 million in Q2 and $24 million in the first half.
- Commodity costs rose in the first half, particularly for dairy, packaging and grains/oils. Management expected volatility and higher costs to continue through the rest of 2013, to be addressed through pricing, manufacturing efficiencies and overhead control.
- The Cadbury integration program had incurred about $1.4 billion of an expected $1.5 billion in charges; management said it achieved approximately $800 million of annual savings in 2012, exceeding its $750 million target a year early. The retained 2012–2014 restructuring program had incurred $209 million of an estimated $925 million in charges; Q2 restructuring charges were $48 million.
- Spin-off costs were $15 million in Q2 and $24 million for the first half; management expected approximately $100 million of such costs in 2013. The Morocco biscuit acquisition cost $119 million net of cash acquired and generated a $22 million remeasurement gain. Two EEMEA divestitures generated $48 million proceeds and $6 million of pretax gains.
- After quarter-end, resolution of a tax audit under a Cadbury tax indemnity was expected to produce $385 million of Q3 income, or $375 million net of tax; the company said it would exclude this item from Adjusted Operating Income and Adjusted EPS.
Risks, contingencies and unusual matters
- Key exposures include foreign currency, commodity prices, pricing and competition, retailer concentration, consumer demand, product quality and recalls, and changes in tax rules or the geographic mix of earnings. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
- The company was cooperating with U.S. and Indian authorities in an FCPA investigation concerning an acquired Indian facility. Cadbury India also contested an Indian excise-tax notice seeking approximately $46 million in tax plus approximately $46 million in penalties and interest.
- A Starbucks-related licensing and supply dispute was in arbitration; the company awaited the arbitrator’s decision. Management did not expect the ultimate costs of these or other legal matters to materially affect financial results.
- Two Mondelēz subsidiaries and a Kraft Foods Group subsidiary jointly guaranteed $1.0 billion of third-party debt maturing October 1, 2013; Mondelēz agreed to indemnify Kraft Foods Group for its subsidiary’s guarantee obligation.
- Goodwill associated with U.S. Confections was $2.177 billion. The unit passed the 2012 impairment test, but management noted that deteriorating gum profitability or valuation assumptions could create future impairment risk.
Important facts for investors to verify
- Whether organic revenue growth and the $1.55–$1.60 Adjusted EPS outlook were achieved, and how results compare with GAAP measures.
- The extent to which favorable discrete tax items influenced first-half earnings and whether the unusually low effective tax rate is repeatable.
- Cash generation and working-capital trends, given the decline in first-half operating cash flow to $418 million.
- Debt refinancing and liquidity plans for the $1.8 billion October 2013 maturity, along with the effect of expanded share repurchase authorization on cash and leverage.
- Currency and commodity developments, especially Venezuela exposure, and progress in improving U.S. gum profitability and managing restructuring costs.
- Developments in the Indian tax and regulatory matters, Starbucks arbitration, the third-party debt guarantee and the subsequent tax-indemnity settlement.